Panera buyout overeggs fast-food feeding frenzy

NEW YORK (Reuters Breakingviews) - Consolidation is fueling inflation in the U.S. fast-food market. JAB, the privately held owner of Krispy Kreme, Peet’s Coffee and other assets, is paying $7.5 billion including debt for Panera Bread. That’s a stratospheric 41 times projected earnings for 2017. The buyer has deep pockets and no pesky shareholders to answer to, and its target boasts one of the industry’s strongest growth rates. But such a lofty valuation will have few rivals in the M&A oven.

The sign on the hood of a delivery truck for Panera Bread Co. is seen in Westminster, Colorado February 11, 2015. REUTERS/Rick Wilking

The latest in a string of fast-food mergers, the deal is the largest ever for a U.S. restaurant chain and not far behind the $12.6 billion that buyout firm 3G’s restaurant vehicle paid for Tim Hortons in 2014. The enterprise value is nearly 17 times this year’s forecast EBITDA, compared with the 10.4 times historic EBITDA that Darden Restaurants paid for Cheddar’s Scratch Kitchen last month.

Panera’s valuation is as rich as many of its menu items, like the 800-calorie Kitchen Sink Cookie. But JAB, the investment vehicle of Germany’s billionaire Reimann family, is not one to let price get in the way of its appetite. It invests for a decade or more and has already shown a willingness to pay handsomely for strong brands like Peet’s, European coffee roaster Jacobs Douwe Egberts, cosmetics house Coty and stiletto-maker Jimmy Choo.

With Panera, JAB is getting above-average growth as part of the recipe. The company is aggressively rolling out digital ordering and payment kiosks to speed customers through its more than 2,000 outlets. It’s also introducing delivery service and making a play for the health-conscious with a new line of no-sugar-added beverages. Such initiatives helped boost same-store sales by 5.3 percent in the first three months of 2017. That compares well to the average drop across the industry of 2.7 percent in the three months to the end of February, according to Black Box Intelligence.

JAB’s move may encourage others to move quickly while there are still plenty of pickings in the fragmented fast-food industry. But carb-loading at this level can lead to indigestion.

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